Tuesday, 23 October 2012

Steps Towards a Better Future?

Good news for Greece yesterday, as according to Reuters and the Bank of Greece, the nation has posted a current account €1.6 billion surplus for August 2012. What is more impressive is that this is happening for a second consecutive month, with July also presenting a €642 million surplus. Overall, in the January-August period the current account deficit of the country has been reduced by €9.1 billion, an impressive feat. In the following table, where the current account data of the last 6 months can be observed, one may notice a huge improvement compared to last year. Hopefully, the Greeks will be able to keep this up for the next couple of years as well.

Some of you may wonder what a current account is. Well the current account, in addition with the capital account are the two main components of the balance of payments. Now, the balance of payments is just an accounting record of all monetary transactions between a country and the rest of the world.

The main equation of the Current Account is:

CA = (X - M) + NY + NCT

where X stands for exports, M for imports, NY for net income from abroad (which accounts for companies/individuals in the country receiving income from abroad, foreign companies investing in domestic companies or local governments and income from tourism) and NCT for net current transfers (mostly direct country-to-country currency provisions like donations, aid or official assistance).

Traditionally a Current Account is important since under traditional balance-of-payment accounting, the CA plus the Valuation Effects equal the net foreign asset position (NFA)of the country, with NFA being the value of
the assets that country owns abroad, minus the value of the domestic
assets owned by foreigners and Valuation Effects being the change in the value of assets held abroad, minus the changes in the value of domestic assets held by foreign investors. This is considered to essentially
reflect the foreign indebtedness of that country.

Nevertheless, as most economic indicators, this should be taken with a grain of salt as although in general a CA deficit is considered bad, in cases like Australia, where a persistent 18-year CA deficit been driven by private sector has brought more growth to the economy than problems. What should be noted of course is that Australia's public debt is a mere 6% of GDP, compared to 170.6% for Greece. Thus, in the case where debt is minimal, CA could be either positive or negative without much impact on the economy (it may also be true that negative CA could be good for the economy), however, as debt is extremely high in the EU-periphery, a positive CA should be much better.